Will Wall Street Go Free?

Let me try to get this straight. The Justice Department announced last weekend that it has dropped its criminal investigation into wrongdoing by the former executives of American International Group Financial Products, or A.I.G.-F.P. — the group inside A.I.G. that foolishly decided to insure billions of dollars of risk in the mortgage market, and got paid millions of dollars for doing so. So the Obama administration, which has repeatedly pilloried banking executives in an effort to build support for its financial reform package, has in one step reduced exponentially the chances of actually holding people on Wall Street accountable for the financial crisis, which was an utterly preventable self-inflicted wound. This is simply incomprehensible.

Especially since the facts with which to hold people accountable are so compelling. Forthwith, then, a financial crisis reminder primer:

During the spring of 2007, two hedge funds run by Bear Stearns started to lose value after 40 consecutive months of positive returns. By June 2007, the funds’ nervous investors and short-term lenders started heading to the exits. To appease the short-term lenders, whose loans were secured by the squirrelly mortgage-related securities in the fund, Bear Stearns itself offered to take many of them out at 100 cents on the dollar, effectively becoming the sole short-term lender to the hedge funds. Bear Stearns offered the hedge-funds’ investors much less.

News that the Justice Department has dropped an investigation into the insurance giant makes one wonder if anyone will pay the price for destroying the economy.

In July, the two funds were liquidated. Investors ended up losing some $1.6 billion. As the new, principal lender to the funds, Bear Stearns foreclosed on its collateral and took billions of dollars of these mortgage-related assets on to its balance sheet, which was already stuffed to the gills with many similar securities that were also rapidly losing value in the market. In December 2007, Bear Stearns reported a pre-tax loss for its fiscal fourth-quarter of nearly $1.4 billion, primarily because of the write-downs it took on the hedge-fund collateral it had just absorbed. The loss was the firm’s first in its 85-year history. Three months later, Bear’s creditors and customers lost total confidence in the firm, causing a “run” on the bank and leaving the firm with the stark choice of either selling itself for a song to JPMorgan Chase or being liquidated. (It chose the former.)

By June 2008, a grand jury in the Eastern District of New York had indicted the two Bear hedge-fund managers, Ralph Cioffi and Matthew Tannin, on criminal charges of conspiracy, securities fraud and wire fraud in conjunction with their management of the funds. Their trial, which lasted three weeks, starting in October 2009, ended with their acquittal. One juror said after the verdict that she wished she could invest her money with Cioffi and Tannin, even though those who had done so lost some $1.6 billion. No one else from Bear Stearns has been charged with any crimes in the firm’s collapse, nor have there been any reports of ongoing investigations. Could this be because JPMorgan Chase agreed to indemnify Bear’s officers and directors for six years following the completion of the merger?

Sometime shortly after Lehman Brothers filed for bankruptcy in the early morning of Sept. 15, 2008 — Lehman’s shareholders were wiped out and the best its creditors could expect to recover was pennies on the dollar — three grand juries in New York and New Jersey reportedly began investigating whether the senior executives of Lehman, including Dick Fuld, the firm’s longtime chief executive, and Erin Callan, its short-lived chief financial officer, had engaged in criminal wrongdoing leading up the firm’s demise by inaccurately portraying Lehman’s financial condition at the same time they were raising new capital for the firm.

Fuld and Callan, of course, emphatically deny having misbehaved, although thanks to the 2,200-page examiner’s report, prepared by Anton R. Valukas at a cost of $30 million to the Lehman estate, we know better. One executive after another at the firm signed off on the infamous “Repo 105” accounting trick in order to move some $50 billion of its most liquid assets off Lehman’s balance sheet at the end of quarters in 2007 and 2008, apparently to deceive creditors and investors about the size and riskiness of Lehman’s exposure to these assets. Despite Valukas’ inflammatory findings and his prosecutorial roadmap, there has not been a word from the grand juries or the corresponding United States attorneys about any pending criminal charges against these Lehman executives.

Meanwhile, a single trader at Morgan Stanley, Howard Hubler, made a gigantic, wrong-way bet on the mortgage market, costing his firm some $9 billion in 2007 — the single largest loss a trader has ever incurred on Wall Street — and almost sending Morgan Stanley to a fate similar to that of Bear Stearns and Lehman. Yet Morgan Stanley allowed Hubler to resign quietly and, according to Michael Lewis’ book “The Big Short,” to walk off with a severance package worth “tens of millions of dollars.” There has been no talk of a criminal investigation into Hubler’s trading at Morgan Stanley or why they paid him so much money to go away.

At Merrill Lynch, between December 2006 and April 2007, executives allowed the firm’s balance sheet to balloon to some $45 billion, from $10 billion, with the similar types of risky, mortgage-related securities that sank Bear Stearns and its two hedge funds. The idea was to package and sell the securities to investors but, as the music slowed, Merrill got stuck with a growing inventory of these risky securities. “It didn’t grow much from that point, but it was too late,” Stan O’Neal, the Merrill chief executive at the time, told me recently. He said he had tried to sell Merrill that fall to both Bank of America and Wachovia, but was effectively nixed in those efforts by the Merrill board.

By the end of October 2007, Merrill’s problems were so acute that the company wrote off $7.9 billion of Merrill’s inventory of collateralized debt obligations, or C.D.O.’s, and subprime-related mortgages. That figure was 75 percent greater than what Merrill had predicted earlier in the month. One week later, O’Neal resigned under pressure and received a severance package of around $161.5 million.

In September 2008, on the brink of bankruptcy, Merrill sold itself to Bank of America in a deal valued at the time at $50 billion in Bank of America’s stock, less than half of what it had been trading for a year earlier. The deal has become a legend on Wall Street for making a silk purse out of a sow’s ear. But, still, there has been no talk of a criminal investigation into how Merrill Lynch’s executives, or its board, could have allowed Merrill to take such huge risks that nearly bankrupted the firm. (To be sure, there are plenty of civil suits still floating around all of these firms.)

Now comes the news that the Justice Department has ended its two-year criminal investigation into the behavior of A.I.G.-F.P.’s senior executives, among them Joseph Cassano and Andrew Forster. When the group’s insurance bets went against A.I.G., the federal government bailed out the company with $182 billion of the American taxpayers’ money. The paper trail Cassano left behind for the Justice Department to investigate seemed fairly damning, including his repeated insistence to shareholders and others that his bets were safe. For example, in August 2007, he wrote, “It is hard for us, and without being flippant, to even see a scenario within any kind of realm of reason that would see us losing $1 in any of those transactions.”

On Nov. 29, 2007, Timothy Ryan, a partner at PricewaterhouseCoopers, A.I.G.’s auditor, told Martin Sullivan, A.I.G.’s chief executive, in an e-mail that in “light of A.I.G.’s plans to hold [an] investor conference on December 5,” Pricewaterhouse believed there was a growing possibility of a “material weakness” in A.I.G.-F.P.’s insurance portfolio that could result in potentially huge future losses. Such a warning needed to be disclosed to investors, according to S.E.C. rules, but the insurer did not disclose the Pricewaterhouse warning for months. On Dec. 5, during the investor conference, Cassano reiterated his August comment about the portfolio: “It is very difficult to see how there can be any losses in these portfolios.”

That Cassano could somehow escape indictment for his repeated misleading public comments is baffling. But, according to The Wall Street Journal, a “turning point came in recent months” about whether to prosecute Cassano “when prosecutors found evidence Cassano did make key disclosures” about Pricewaterhouse’s “material weakness” comment. It would be nice to see the exculpatory evidence.

And now for the part that really boggles the mind. If we all seem to be fine with the idea that no one from Bear Stearns, Lehman Brothers, Morgan Stanley, Merrill Lynch or A.I.G. has to pay the price for what transpired at their firms, why in the world are we so anxious to take out all of our collective anger for what happened in the financial crisis on Goldman Sachs, the only firm that had the intellectual and financial wherewithal to figure out there were serious risks in the mortgage market and to do something about it — albeit for its own benefit?

In late 2006 and early 2007, Goldman perceived trouble in the mortgage market and made the decision to neutralize its exposure and then to short the market. When the mortgage market collapsed following the demise of the Bear Stearns’ hedge funds, Goldman ended up making around $4 billion in 2007 from its short bets and was profitable for the year, while most of the other firms were losing billions.

The S.E.C.’s civil lawsuit against Goldman Sachs, filed on April 16, as well as the all-day spectacle 11 days later before Senator Carl Levin’s Permanent Committee on Investigation, shaved some $20 billion off Goldman’s market value. The timing of these two public floggings of Goldman remains curious, of course, coming as they did on the eve of crucial procedural votes in the soon-to-be concluded financial reform legislation.

It’s not surprising that the S.E.C.’s inspector general has started an investigation, at the urging of Rep. Darrell Issa, Republican of California, into the timing of the S.E.C.’s lawsuit against Goldman.

Now that the politicians in Washington have used Goldman Sachs as a bogeyman to help push through new legislation to re-regulate Wall Street — which is badly in need of it — the American people should now get the justice we deserve, in the form of prosecuting the people on Wall Street who had major roles in causing the financial crisis in the first place. Unless, of course, we would prefer to pretend that no one was responsible and it was just another one of those once-in-a-lifetime tsunamis we’ve been hearing so much about lately.

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William D. Cohan, a former investigative reporter in Raleigh, N.C., writes on alternate Thursdays about Wall Street and Main Street. He worked on Wall Street as a senior mergers and acquisitions banker for 15 years. He also worked for two years at GE Capital. He is the author of “House of Cards: A Tale of Hubris and Wretched Excess on Wall Street,” “The Last Tycoons: The Secret History of Lazard Freres & Co.” and the forthcoming “Money and Power: How Goldman Sachs Came to Rule the World.” In addition to The New York Times, he writes regularly for Vanity Fair, Fortune, the Financial Times, ArtNews and The Daily Beast.